The 2008 banking crisis and subsequent recession caused major UK institutions to review lending arrangements with customers to limit their exposure to risk.
Those of you who are directors may have been asked to enter into a personal guarantee with your bank, as this is one of the most common forms of securing a company’s liabilities.
The use of guarantees and indemnities is now becoming more commonplace in business. If your company is entering into a major contract, you may wish to consider asking for a guarantee from the customer’s parent company, or personally from the directors. You then know a third party can be approached should your customer fail to pay money owed. Similarly, a guarantee can be helpful if you are unsure of a potential client’s creditworthiness, but you do not want to lose the work.
Guarantees v indemnities
Whilst most guarantees contain an indemnity provision, the two are distinct legal obligations. The key differences are set out below:
- What is a guarantee/indemnity? A guarantee is a contract in which the guarantor promises to be responsible, alongside the borrower, for a certain set of obligations. An indemnity is an obligation imposed by the law whereby one person must make good a loss suffered by another.
- Must a guarantee/indemnity be in writing? Section 4 of the Statute of Frauds Act 1677 deems a guarantee unenforceable unless it is in writing, whereas an indemnity made orally can be legally valid.
- If the borrower is no longer liable, is the guarantor? The liabilities of a guarantor cease to exist if the contract is voided for some reason, but a person who gives an indemnity will continue to be liable, regardless of the borrower’s status.
Independent legal advice
If you are asked by a bank to sign a personal guarantee, they will insist you seek the advice of a solicitor to ensure you cannot avoid your obligations on the grounds that you did not understand what you were entering into. Here are the key points to consider:
- All monies: A guarantee will nearly always extend to ‘all monies and liabilities’ owed to the bank/supplier now or at any time in the future. It does not, therefore, just cover the amount being lent under current arrangements, but money owed at any time.
- Continuing security: This means a guarantor is agreeing to secure all sums owed to the bank/supplier. Even if the liabilities are reduced to nil, the guarantee will still continue unless it is terminated by either party.
- Continuing liability: A guarantor’s liability almost always continues, irrespective of their involvement with the company they are securing, unless it is terminated. Generally, this commitment does not cease upon the guarantor’s death, but instead passes to the estate.
- Termination of the guarantee: Most banks allow the guarantor to terminate the agreement by giving notice. This does not automatically release the guarantor, but crystallises their liabilities at the end of the notice period. From this point on, the guarantor will only be liable for the total amount owed on the date the notice expires and not for any new indebtedness. Only if the company owes nothing on the date of termination will the guarantor’s obligations come to an end.
For further information about guarantees and indemnities, contact Taylor&Emmet’s corporate team. This article is intended for information only and should not be relied upon by any party. Always seek specific legal advice.